## Global Financial Stability Report: Enhancing Resilience Amid Uncertainty (April 2025)

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### Preface — Systemic risks and context
- Financial stability risks have increased since October 2024.
- Elevated economic policy uncertainty has raised financial market volatility and reduced investor confidence.
- Global financial markets may be at a turning point given substantially elevated equity and bond market conditions that have tightened global financial conditions.
- Recent shocks absorbed by the global financial system include the COVID-19 pandemic (2020), the global surge of inflation beginning in 2021, and Russia’s war in Ukraine (starting in 2022).
- Elevated sovereign debt levels interact with financial sector imbalances and can amplify adverse shocks.
- Conventions and timing:
  - The GFSR reflects information available as of April 9, 2025; selected figures and Chapter 1 panels reflect information through April 15, 2025.
  - Definitions: “Billion” = a thousand million; “Trillion” = a thousand billion; “Basis points” = hundredths of 1 percentage point.

### Financial sector resilience and remaining vulnerabilities
- Banks
  - Banks have substantially increased capital and liquidity, enhancing loss-absorption capacity.
  - Continued, timely, and consistent implementation of Basel III and other internationally-agreed bank regulatory standards is emphasized.
  - Proactive supervision of the largest institutions and a proportionate approach consistent with the Basel Core Principles are recommended.
- Nonbank financial intermediation (NBFI)
  - NBFIs’ role and banks’ exposures to NBFIs have grown; NBFIs include insurance companies, pension funds, investment funds (mutual funds, exchange-traded funds, hedge funds, private equity, private credit), and finance companies.
  - Reforms already undertaken include money market fund reforms, limits on liquidity risks in mutual funds, margin-setting in central counterparties, improved broker-dealer counterparty risk management, and trading rules in exchanges and electronic platforms.
  - Persistent data gaps hinder timely assessment of vulnerabilities; strengthening data availability is paramount to enable systemwide risk views and identify poorly governed institutions.
  - International standard setters plan further work on cross-border/cross-sector interconnectedness and international coordination.
- Market infrastructure
  - Sound trading arrangements and infrastructures ("financial plumbing") are essential for macrofinancial stability and resilient system operation.

### Foreword — Key messages and lessons
- Payment and settlement systems must be resilient and interoperable, particularly across borders.
- Innovative technologies (blockchain, artificial intelligence) can enhance efficiency and security of payment and settlement systems.
- Crisis preparedness and proactive regulatory policies remain foundational; even well-regulated systems can face systemic crises.
- Lessons from March 2023 banking turmoil:
  - Supervisors need willingness, legal authority, and ability to intervene early.
  - Large and rapid liquidity provision may be required; central banks should develop emergency liquidity assistance frameworks in advance.
  - Recovery and resolution frameworks must be further implemented, including for small banks that can pose systemic risks.

### Executive Summary — Macrofinancial risks, drivers, and quantified downside scenario
- Overall assessment
  - Global financial stability risks have increased significantly, driven by tighter global financial conditions and heightened economic and trade uncertainty.
  - IMF’s Growth-at-Risk (GaR) model: in the year ahead and with a 5 percent chance, global growth could fall below 0.4 percent — nearly a full percentage point worse than the October 2024 assessment.
- Immediate drivers and market developments
  - Tariff announcements beginning in February 2025 and especially the April 2, 2025 US tariffs on almost all trading partners triggered sharp market reactions: US equity prices declined significantly after April 2, 2025; the sell-off accelerated worldwide.
  - Corporate bond spreads widened on net; implied equity market volatility spiked (VIX latest level as of April 15, 2025).
  - Long-term benchmark government bond yields initially fell then rose sharply; US Treasury yields rose as dealers reached intermediation limits and market liquidity deteriorated.
  - Two-year bond yields declined consistently since April 2, 2025, reflecting expectations of more policy rate cuts by major central banks.
  - Markets regained some footing after the April 9, 2025 announcement that the United States would postpone implementation of higher tariffs.
- Three forward-looking vulnerabilities
  - Vulnerability 1 — Further correction of asset prices: US stock market trading around the 80th historical percentile of 12-month-forward P/E ratios since 1990; stretched valuations remain in some equity and corporate bond segments.
  - Vulnerability 2 — Strains in highly leveraged financial institutions and NBFIs: rising aggregate leverage in hedge funds and asset managers and stronger nexus with banks increase risk of deleveraging spirals.
  - Vulnerability 3 — Turbulence in sovereign bond markets: emerging markets face highest real financing costs in a decade; major advanced economies will likely issue more bonds amid challenged bond market functioning.
- Policy priorities (high level)
  - Ensure market infrastructures and exchanges maintain market functioning; prepare emergency liquidity and crisis resolution tools; be prepared to intervene in core bond and funding markets.
  - Maintain sufficient capital and liquidity in banking sector; fully implement Basel III; intensify supervision and enhance bank–NBFI linkage assessments.
  - Strengthen nonbank reporting requirements and policies to mitigate nonbank leverage.
  - Macroprudential and fiscal guidance: tighten tools where buffers are insufficient; release macroprudential buffers during downturns when needed; rebuild credible, growth-friendly fiscal buffers and explore liability management operations.
  - Crypto-assets: safeguard monetary sovereignty, strengthen monetary policy frameworks, and adopt unambiguous tax treatment of crypto assets per IMF and FSB road map.
  - International cooperation: multilateral surveillance and a robust global financial safety net are crucial.

### Chapter 1 — Enhancing resilience amid global trade uncertainty: asset prices, financial conditions, and institutions
- Asset price and valuation dynamics
  - US equities underperformed recently; sell-off accelerated after April 2.
  - Model-implied long-term growth in earnings has started to decline globally since February; implied earnings remain higher for US companies than for other advanced economies or EMs.
  - US equity risk premium (ERP) compressed to historically low levels since October GFSR.
- Crypto-assets
  - Bitcoin net strong performance since October 2024 but down over 25 percent from the peak at the beginning of the year.
  - Stablecoins market capitalization has surpassed $200 billion.
  - Assets in Bitcoin exchange-traded products now surpass $80 billion.
  - Shocks from stock market appear to spill over to Bitcoin more than vice versa.
- Financial conditions, GaR, and vulnerabilities
  - Tightening of global financial conditions accelerated since October 2024 and notably after April 2 tariffs.
  - The GaR forecast: one-year-ahead global growth falls below 0.4 percent with a 5 percent chance; GaR deteriorated from around 1.2 percent in October 2024 and is now around the 30th historical percentile.
- Banking sector headwinds from trade shock
  - April 2 tariff announcement led to sharp decline in bank stock prices.
  - In 2024, widening net interest margins and noninterest income helped profitability; these cyclical supports could reverse with trade shock and lower policy rates.
  - Trade finance supports over $10 trillion in annual transactions and generates $18 billion of bank revenues globally; tariffs can disrupt trade finance and tighten bank lending criteria.
  - Internationally active non-US banks are vulnerable to increased US dollar funding pressures.

### Risk weights, RWA densities, and capital buffers
- RWA density findings
  - Density of risk-weighted assets in GSIBs has declined 12 percent over the past five years.
  - Basel Committee found capital requirements based on bank-estimated risk parameters can differ by more than 20 percent.
  - Output floor and other Basel policies exist but have not been implemented in several jurisdictions.
- Banks’ profitability and vulnerabilities
  - Sample indicators reference a sample of 829 banks; price-to-book index (October 1, 2024 = 100) and return on assets figures cited in chapter exhibits.
  - Sharp decline in bank valuations after April 2 tariffs increases the IMF’s monitoring list of weak banks.

### Bank–NBFI linkages and private credit
- Rising exposures and funding links
  - US banks’ loans and commitments to NBFIs increased from about 6 percent of total in 2010 to about 16 percent (equivalent to almost 120 percent of bank regulatory capital) as of Q3 2024.
  - Hedge funds rely on banks, particularly GSIBs, for more than 50 percent of their total funding.
  - Identified bank exposures to private credit vehicles exceed $500 billion; total bank exposure likely exceeds 25 percent of assets under management in private credit funds.
  - Cross-border direct-lending expansion increases risk of cross-jurisdictional transmission and underscores need for supervisory coordination.
- Leverage and futures exposure
  - Asset managers have expanded leveraged positions via long futures in Treasuries and US equities; US mutual funds account for about half of net long positions in two- and five-year Treasury futures.
  - Hedge fund leverage:
    - Assets under management of leveraged hedge funds doubled over the past decade.
    - Average ratio of gross notional exposure to assets has more than doubled over the past decade.
    - Strategy gross notional exposures (ratio to asset values): Macro strategies: 40; Relative-value fixed-income: 25; Multistrategy: more than 15.
    - Representative sample Q1 2024: hedge funds owned $1.6 trillion in Treasury bonds and were short $1.3 trillion in the same instrument.
    - US SEC estimate: $8 trillion in interest rate derivative exposures (Q1 2024, sample). IOSCO survey: hedge funds held more than $25 trillion in interest rate derivatives as of end-2022.
  - Stress transmission: margin calls, repo rate spikes, and forced selling can cause disorderly unwinds (March 2020 dash-for-cash cited).

### Emerging and frontier markets: exposures, flows, and financing needs
- Capital flow tail risks
  - Emerging market capital outflows could reach 1.6 percent of GDP over the next year with a 5 percent chance; a tail scenario with a broad dollar rise and further US equity sell-off could worsen to 1.9 percent.
- Sovereign financing and fiscal pressures
  - On aggregate, EM sovereign credit ratings showed positive momentum over the last year.
  - Future gross financing needs forecast to remain above prepandemic averages in most EMs; more government revenue must be spent on interest payments.
  - Expectations of weaker growth have led to expectations of monetary easing; real interest rates are still around their highest levels over the past decade.
- Frontier economies
  - Yields remained high for many frontier economies increasing refinancing risks; most international debt is issued when yields are below 10 percent.

### Market functioning, dealer capacity, and Treasury market stresses
- Treasury market scale and dealer intermediation
  - Treasury market is now five times dealers’ balance sheets, up from about one-and-a-half times around 20 years ago.
  - Swap spreads declined sharply during the recent sell-off, reflecting pressure on dealer balance sheets amid broad deleveraging.
  - Repo funding costs rose only marginally compared with past episodes; dealer capacity utilization and residual illiquidity measures cited in chapter exhibits.
- Dealer activity shifts
  - Dealers shifted balance-sheet usage toward equity margin loans and options market-making; equity financing spreads more attractive than fixed-income repo spreads.
  - Overcollateralization rates have fallen; equity margin loans extended under looser risk standards increase dealer exposure to hedge fund counterparty losses.
- Cross-border dollar funding
  - Euro area banks increased borrowing in US repo markets, swapping proceeds back into euros; reliance on US repo funding deepens cross-border dollar funding interconnections and rollover risks.
  - Policy implication: importance of standing repo facilities and central bank swap lines as coordinated backstops.

### Corporate, household, and CRE vulnerabilities
- Corporate sector
  - Corporate cash flows broadly healthy in 2024 but bond spreads widened recently; US high-yield spreads rose as business optimism faded.
  - Substantial share of soon-maturing corporate debt carries fixed rates below prevailing market yields, raising refinancing risks for weaker firms.
  - Current shares of corporates with interest coverage ratios (ICRs) below 1: Advanced economy corporates: 12 percent; Emerging market corporate firms outside China: 18 percent.
  - IMF analysis: for EM corporates, an initial 50 basis point compression in profit margins and equivalent increase in effective interest rates could raise the share of debt with poor serviceability by 6 percentage points; a 200 basis point impact could increase the share by 17 percent.
- Households
  - Households hold more equities as a share of financial assets than in 2019; US households’ stock holdings reached a record high by end-2024; US households’ exposure to equities and investment fund shares modestly surpasses real estate.
  - US mortgage rate distribution: 83 percent of US mortgage holders have an interest rate below 6 percent (down from about 93 percent mid-2022).
- Commercial real estate (CRE)
  - Global CRE total returns: 1.3 percent in Q4 2024.
  - US office sector values declined 12.3 percent year over year; industrial and retail values remained steadier.
  - US CRE mortgages due payoff in 2025: $660 billion.
  - CRE debt maturing 2025–2029 in the US: about $3.2 trillion (more than half of $6.1 trillion outstanding).
  - Nearly 30 percent of office loans maturing in 2025 (about $30 billion) may be subject to negative equity.
  - $19 billion of loans on apartment properties (10 percent of maturing loans) may be subject to negative equity.
  - CMBS payoff behavior: 61 percent of US loans matured in 2024 were actually paid off, compared with 78 percent over the previous decade.
  - Refinance rates in 2024 by conduit loan collateral type: office: 32 percent; industrial, multifamily, retail: about 85 percent.
  - US CRE loan default rate Q4 2024: about 1.57 percent; US banks’ net charge-offs on CRE loans at end-2024: 0.26 percent.
- Policy recommendations for CRE and households
  - Ensure financial institutions can access central bank liquidity facilities; test access periodically.
  - Strengthen recovery and resolution frameworks and supervisory intensity; implement targeted macroprudential measures where buffers are insufficient.

### Box 1.2 — Chinese life insurers
- Lower bond yields exert pressure on Chinese life insurers:
  - Solvency ratios deteriorated; equity valuations weaker relative to other jurisdictions.
  - Liquidity improved as insurers reduced alternative and illiquid investments.
  - Calculations based on six listed life insurers in China (listed by name in the chapter).

### Chapter 2 — Geopolitical risks: effects on asset prices and financial stability
- Geopolitical risk indicators and stylized facts
  - Composite geopolitical risk measures reached highest levels in several decades; about 450 major geopolitical risk events identified across 1985–2024; about one-sixth are international military conflicts.
  - Aggregate stock prices: average impact across events about a 3 percent decline; some events caused up to a 9 percent average decline.
  - Commodity exporters often see positive stock returns after major GPR events; commodity importers typically suffer.
- Transmission channels
  - Economic channel: trade restrictions, financial restrictions, physical damage transmitting via supply-chain disruption, capital-flow reversal, payment disruption, and debt pressures.
  - Market sentiment channel: increased uncertainty raises risk aversion, lowers valuations, and increases liquidity and credit risks.
- Quantitative effects and firm-level findings (Annex 2.4 highlights)
  - Aggregate stock prices generally decline by about 0.3 percent in response to a country-specific GPR shock; more severe shocks (≥2 standard deviations) have effects about 7 times larger and persist.
  - Global GPR shocks average effect about 1 percent on aggregate stock prices persisting for a quarter.
  - A two-standard-deviation increase in the global GPR index is associated with a decline of 2 percentage points in downside tail risks to stock returns in advanced economies at six months.
  - Firm-level panel (over 60,000 firms): stock returns decline by about 1 percentage point in the month of a major domestic GPR event (sample average monthly firm return about 0.6 percent).
  - International military conflicts have much larger effects—about 5 percent—on EM firm stock prices than on AE firms.
- Pricing of GPR in markets
  - Equity GPR betas: portfolio that long-high-decile and short-low-decile GPR betas generated negative premiums of about 0.5 percent per month during 2012–21 and a positive premium of about 1.1 percent after 2022.
  - Options markets: premiums for downside and tail protection surged around Russia’s 2022 invasion of Ukraine, largest for Russian firms and rising for firms in European countries.
- Financial institutions’ exposures and implications
  - Cross-border bank claims and liabilities involving countries afflicted by major GPR events were about 8 and 10 percent of total cross-border bank claims and liabilities, respectively, as of H2 2024.
  - Equity funds’ holdings of assets domiciled in afflicted countries reached 13 percent of assets in 2024.
  - Banks and funds reduced exposures to Russia and Ukraine materially after 2014 and 2022 events.
  - Empirical results: bank equity tends to decline when home country or key foreign counterparts are involved in international military conflict, and declines in bank equity contribute to declines in loan growth.
  - Investment funds with 10 percent holdings in countries affected by international military conflicts suffered a 1.0 percentage point decrease in returns and a 2.3 percentage point decline in flows; equity funds experienced about a 0.2 percentage point return decline and 0.3 percentage point flow decline on average.
  - After Russia’s invasion of Ukraine, funds with 10 percent direct exposures experienced about a 6 percent decline in cumulative returns within a week and an 8 percent decrease in cumulative flows over six months.
- Policy recommendations on geopolitical risks
  - Managers and oversight bodies should identify, quantify, and manage geopolitical risks; perform scenario analysis and stress testing incorporating market, credit, and liquidity interactions.
  - Collect data on direct and indirect exposures to enable scenario analysis.
  - Ensure capital and liquidity buffers can absorb extreme but plausible losses from geopolitical risk materialization.
  - Strengthen crisis preparedness and management frameworks; ensure tools to tackle NBFI stress, including liquidity management tools for open-end funds.
  - Deepen EM and developing country financial markets with robust regulation and clear derivatives/hedging guidance.
  - Contain fiscal vulnerabilities and ensure adequate international reserves per the IMF’s Integrated Policy Framework.

### Select exact numeric figures and statistics cited in the unit
- GaR downside: global growth could fall below 0.4 percent with a 5 percent chance.
- US tariffs announced April 2, 2025; markets data through April 15, 2025.
- US banks’ loans and commitments to NBFIs: about 6 percent (2010) to about 16 percent (Q3 2024), equivalent to almost 120 percent of bank regulatory capital (Q3 2024).
- Trade finance supports over $10 trillion in annual transactions and generates $18 billion of bank revenues globally.
- Hedge funds sample Q1 2024: owned $1.6 trillion in Treasury bonds and were short $1.3 trillion in the same instrument.
- Strategy gross notional exposures (ratio to asset values): Macro: 40; Relative-value fixed-income: 25; Multistrategy: more than 15.
- US SEC estimate: $8 trillion in interest rate derivative exposures (Q1 2024 sample); IOSCO: more than $25 trillion in interest rate derivatives as of end-2022.
- Emerging market capital outflows at risk: 1.6 percent of GDP (5 percent chance); tail scenario: 1.9 percent.
- CRE metrics:
  - US commercial and multifamily mortgages due payoff in 2025: $660 billion.
  - CRE debt maturing 2025–2029 in the US: about $3.2 trillion (more than half of $6.1 trillion outstanding).
  - Nearly 30 percent of office loans maturing in 2025 (about $30 billion) may be subject to negative equity.
  - $19 billion of apartment-property loans (10 percent of maturing loans) may be subject to negative equity.
  - US CRE loan default rate Q4 2024: about 1.57 percent.
  - US banks’ net charge-offs on CRE loans at end-2024: 0.26 percent.
- Dealer/Treasury market scale: Treasury market now five times dealers’ balance sheets (vs about one-and-a-half times ~20 years ago).
- Military-expenditure-to-GDP figure values displayed: 1.2, 2.8, 1.6, 2.0, 2.4.
- About 450 major geopolitical risk events identified across 1985–2024; about one-sixth are international military conflicts.
- Aggregate stock-price impacts across major GPR events: average decline about 3 percent; some events up to 9 percent on average.
- Sovereign CDS spread effects within one month of involvement in international military conflict: about 40 basis points (advanced economies) and about 180 basis points (emerging market economies).

*International Monetary Fund | Global Financial Stability Report: Enhancing Resilience Amid Uncertainty (April 2025).*

### Preface                                                                                                                 

### Preface

### Overview of current systemic risks and context
- Financial stability risks have increased since October 2024.
- Elevated economic policy uncertainty has raised financial market volatility and reduced investor confidence.
- Substantially elevated equity and bond market conditions have tightened global financial conditions, indicating global financial markets may be at a turning point.
- Recent shocks that the global financial system has absorbed include the COVID-19 pandemic in 2020, the global surge of inflation beginning in 2021, and Russia’s war in Ukraine starting in 2022.
- Uncertainty about economic policies, notably tariffs, is again testing the resilience of the global financial system.
- Elevated levels of sovereign debt are a concern due to interactions between financial sector imbalances and government debt, which can amplify adverse shocks.

### Financial sector resilience and remaining vulnerabilities
- Banks remain at the core of the financial system and have substantially increased levels of capital and liquidity, enhancing their capacity to absorb losses.
- Continued, timely, and consistent implementation of Basel III and other internationally-agreed-upon bank regulatory standards is emphasized as important to ensure a level playing field and sustained capital and liquidity buffers.
- Increased focus on proactive supervision of the largest institutions globally is seen as a key contributor to stability.
- A proportionate approach to supervision consistent with the Basel Core Principles for Effective Banking Supervision is recommended to increase efficiencies in credit provision, implying simpler, risk-sensitive requirements for smaller banking institutions while strengthening resilience to shocks.

### Nonbank financial intermediation (NBFI): growing role and policy priorities
- The role of nonbank financial intermediation (NBFI) and banks’ exposure to NBFIs have grown, increasing NBFIs’ influence on systemwide financial stability.
- NBFIs encompass insurance companies, pension funds, investment funds (mutual funds, exchange-traded funds, hedge funds, private equity, and private credit), and finance companies.
- Important reforms already undertaken include:
  - Reforms to money market funds.
  - Limits to liquidity risks in mutual funds.
  - Margin-setting in central counterparties.
  - Counterparty risk management practices for broker-dealers.
  - Trading rules in exchanges and electronic trading platforms.
- Persistent data gaps hinder complete and timely assessment of vulnerabilities and challenge decision making for private sector participants and policy makers.
- Strengthening data availability for risk monitoring and assessment is paramount to:
  - Enable a systemwide view of risks.
  - Identify poorly governed institutions taking excessive risks.
  - Ensure national authorities have appropriate tools to manage risks effectively.
- International standard setters plan further work, including examining cross-border and cross-sector interconnectedness and enhancing international coordination.

### Market infrastructure and trading arrangements
- Sound trading arrangements and infrastructures ("financial plumbing") are essential for maintaining macrofinancial stability and for the smooth operation of a resilient global financial system.

### Conventions and report timing relevant to the assessment
- The report uses the following conventions (as stated): . . . to indicate that data are not available or not applicable; — to indicate that the figure is zero or less than half the final digit shown or that the item does not exist; – between years or months (for example, 2021–22 or January–June) to indicate the years or months covered, including the beginning and ending years or months; / between years or months (for example, 2021/22) to indicate a fiscal or financial year.
- Definitions: “Billion” means a thousand million. “Trillion” means a thousand billion. “Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
- This GFSR reflects information available as of April 9, 2025. In the Executive Summary, data used in Figures ES.1, ES.2, and ES.6, and in Chapter 1, Figure 1.1 (all panels), Figure 1.2 (panel 2), Figure 1.3 (panel 1), Figure 1.4 (all panels), Figure 1.5 (all panels), Figure 1.6 (panel 1), Figure 1.14 (panel 5), Figure 1.19 (panel 4), reflect information through April 15, 2025.
- The analysis and policy considerations are those of contributing IMF staff and should not be attributed to the IMF, its Executive Directors, or their national authorities.

*Preface — Global Financial Stability Report (GFSR), International Monetary Fund, April 2025*

### FOREWORD

### FOREWORD

### Key messages on financial stability and resilience
- Emphasizes the need for resilient payment and settlement systems so that the movements of securities, derivatives, and payments can continue during periods of market volatility.
- Prioritize the interoperability of various platforms, particularly across borders, to ensure efficient and reliable operation of payment and settlement systems.
- Advocates embracing innovative technologies—such as blockchain and artificial intelligence—to enhance the efficiency and security of payment and settlement systems, contributing to a more stable financial environment.
- Stresses that even well-regulated financial systems may face shocks so severe that they lead to systemic crises; crisis preparedness and proactive regulatory policies remain foundational for financial stability.

### Lessons from March 2023 banking turmoil (actionable assessments)
- Supervisory intervention:
  - Supervisors need the willingness, legal authority, and ability to act to intervene early in weak institutions.
- Liquidity provision:
  - Stabilizing the financial system may require a large and rapid provision of liquidity to financial institutions.
  - Central banks should further develop their frameworks for emergency liquidity assistance during regular periods so they are well prepared for potential intervention in a crisis.
- Recovery and resolution:
  - Even small banks can pose risks to financial stability.
  - Make further progress in implementing recovery and resolution frameworks to effectively address challenges posed by weak or failing financial institutions, with the goal of minimizing the need for public funding.

### Assessment of evolving vulnerabilities (Executive Summary highlights)
- Overall assessment:
  - The report assesses that global financial stability risks have increased significantly, primarily due to the tightening of global financial conditions.
  - According to the IMF’s Growth-at-Risk model, macrofinancial downside risks to growth have increased meaningfully.
- Asset valuations and uncertainty:
  - The October 2024 Global Financial Stability Report highlighted stretched asset valuations, growing financial system leverage, and low financial market volatility against a backdrop of heightened levels of economic uncertainty (Figure ES.1).
  - Despite recent market turmoil, valuations remain high in some key segments of equity and corporate bond markets, implying readjustments could go further if the outlook deteriorates.
  - Economic policy uncertainty remains high; some macroeconomic indicators have surprised to the downside (see the April 2025 World Economic Outlook).
- Trade policy shock and market response:
  - A sharp repricing of risk assets followed the series of tariff announcements by the United States since February and accelerated following the April 2 release of plans for larger-than-expected tariffs.
  - Financial market volatility across stock, currency, and bond markets rose markedly; responses by other countries further amplified uncertainties.
- Emerging markets and frontier economies:
  - Downside asset price moves could significantly impact emerging markets; their currencies and stock prices have already depreciated due to weakening growth prospects.
  - With investors increasingly expecting emerging market central banks to ease, the expected carry trade returns have fallen, raising the likelihood of capital outflows.
  - In frontier economies, although market conditions had been improving, high levels of yields could expose countries to refinancing risks in an environment where sizable amounts of debt are coming due (Figure ES.3).
- Nonbank financial intermediaries and leverage:
  - Some financial institutions could come under strain in volatile markets, especially highly leveraged ones.
  - As the hedge fund and asset management sectors grew, so have their aggregate leverage levels and the nexus with the banking sector from which they borrow (Figure ES.4), raising the specter of weakly managed nonbank financial intermediaries being pushed to deleverage when they face margin calls and redemptions.
  - Some hedge fund strategies have seen a steady increase of leverage recently (Figure ES.5), potentially exacerbating sell-offs, with implications for the broader financial system.
- Sovereign bond market risks:
  - Further turbulence could descend upon sovereign bond markets, especially in jurisdictions where government debt levels are high.
  - Popular leveraged cash-futures basis trades in core sovereign bond markets and leveraged carry trades in swap markets could unwind and challenge market liquidity (Figure ES.6).

### Data and coverage note
- The assessments and analyses in this GFSR are based on financial market data available to IMF staff through April 15, 2025, but may not reflect published data by that date in all cases.
- Latest level for VIX Index is as of April 15, 2025.
- The IMF FCI long-term standard deviations and averages are calculated over 1990:Q1 and 2025:Q1; daily FCIs shown start April 1, 2025.

*Source: FOREWORD, Global Financial Stability Report: Enhancing Resilience amid Uncertainty (April 2025).*

### ExECUTIvE SUMMARY

### ExECUTIvE SUMMARY

### Macro-financial risks and transmission channels
- Global financial stability risks have increased significantly, driven by tighter global financial conditions and heightened economic and trade uncertainty.
- Investor concerns about public debt sustainability and other fragilities in the financial sector can worsen in a mutually reinforcing fashion.
- Heightened policy and geopolitical uncertainty can affect corporates and households through:
  - widening global corporate bond spreads;
  - a substantial share of soon-maturing corporate debt carrying fixed rates below prevailing market yields, which could challenge refinancing of weaker firms;
  - repricing in equities and other asset prices reducing household wealth, especially as households now allocate a larger portion of financial assets to equities and investment funds than before the pandemic;
  - weaker-than-expected commercial real estate values and still-high interest rates complicating loan refinancing, particularly for properties with negative equity.

- Geopolitical risk is identified as a principal trigger of further sell-offs; major geopolitical events, especially military conflicts, can lead to substantial stock price declines and increases in sovereign risk premiums, with cross-border spillovers via trade and financial linkages.

### Recent market developments and immediate drivers
- Tariff announcements beginning in February 2025 and especially the April 2, 2025 United States tariffs on almost all trading partners triggered sharp market reactions:
  - US equity prices declined significantly after April 2, 2025; the sell-off accelerated worldwide.
  - Corporate bond spreads widened on net; US spreads remained tighter than continental Europe and the United Kingdom.
  - Implied equity market volatility spiked; the Chicago Board of Exchange’s VIX index caught up to trade and economic policy uncertainties.
  - Long-term benchmark government bond yields initially fell as investors sought safe havens but then rose sharply within days; US Treasury yields rose strongly as dealers reached intermediation limits and market liquidity deteriorated.
  - Two-year bond yields declined consistently since April 2, 2025, reflecting expectations of more policy rate cuts by major central banks.
  - Financial market data available to IMF staff through April 15, 2025 underpin these assessments.

- Policy actions and diplomatic developments:
  - Financial markets regained some footing after the April 9, 2025 announcement that the United States would postpone implementation of the higher tariffs to allow for negotiation, but investor anxiety remained as retaliatory measures continued.

### Key vulnerabilities (three forward-looking vulnerabilities)
- Vulnerability 1 — Further correction of asset prices:
  - Valuations remain high in some equity and corporate bond segments conditional on a grimmer economic outlook.
  - US stock market was trading around the 80th historical percentile of 12-month-forward price-to-earnings (P/E) ratios since 1990 despite recent sell-offs.
  - Continued stretched valuations and elevated uncertainty forebode further asset price corrections.

- Vulnerability 2 — Strains in highly leveraged financial institutions and NBFIs:
  - Aggregate leverage in hedge funds and asset managers has increased alongside stronger linkages with the banking sector through borrowing.
  - Highly leveraged or poorly governed nonbank financial intermediaries (NBFIs) could be forced to deleverage under margin calls, creating sell-offs and deleveraging spirals that amplify market turmoil and system-wide stress.

- Vulnerability 3 — Turbulence in sovereign bond markets:
  - Emerging market economies face the highest real financing costs in a decade and may need to issue more debt at high interest rates to fund fiscal spending (see April 2025 Fiscal Monitor reference in text).
  - Major advanced economies will likely issue more bonds to finance enlarging fiscal deficits at a time when bond market functioning has become more challenged.

- Quantified downside scenario from IMF Growth-at-Risk (GaR):
  - According to the GaR model, in the year ahead and with a 5 percent chance, global growth could fall below 0.4 percent — a figure nearly a full percentage point worse than the October 2024 assessment.

### Policy recommendations and preparedness
- Market functioning and crisis tools:
  - Ensure market infrastructures and exchanges maintain market functioning.
  - Prepare emergency liquidity and crisis resolution tools; ensure financial institutions can access central bank liquidity facilities.
  - Be prepared to intervene to address severe liquidity or market functioning stress, especially in core bond and funding markets.
  - Liquidity can be provided to nonbanks with appropriate guardrails (reference to Chapter 2 of April 2023 Global Financial Stability Report).

- Supervision, regulation, and buffers:
  - Maintain sufficient levels of capital and liquidity in the banking sector; full, timely, and consistent implementation of Basel III and other international standards remains key and should be complemented by independent and intensive supervision.
  - Enhance supervisors’ assessment of bank–NBFI linkages given the deepening nexus between banks and nonbank financial intermediaries.

- Nonbank sector resilience:
  - Strengthen policies to mitigate nonbank leverage and other vulnerabilities.
  - Implement enhanced nonbank reporting requirements to develop systemwide and cross-sectoral risk perspectives and distinguish poorly governed and excessively risky institutions.

- Macroprudential and fiscal policy guidance:
  - Strengthen prudential policy frameworks, including micro- and macroprudential approaches.
  - Countries with insufficient buffers should tighten macroprudential tools to increase resilience while avoiding broad tightening of financial conditions.
  - Where downturns lead to financial stress, macroprudential buffers could be released to help banks absorb losses and support credit provision.
  - Rebuild credibly and growth-friendly fiscal buffers given high and rising debt; proactively explore liability management operations to manage refinancing risks and smooth debt servicing profiles where opportunities arise.
  - For countries where debt is at risk of becoming unsustainable, early contact with creditors to coordinate orderly and efficient debt treatment could avert costly defaults and prolonged loss of market access.

- Crypto-assets and monetary sovereignty:
  - Jurisdictions should safeguard monetary sovereignty, strengthen monetary policy frameworks, guard against excessive volatility in capital flows, and adopt unambiguous tax treatment of crypto assets, following the IMF and Financial Stability Board road map for building institutional capacity.

- International cooperation and safety nets:
  - Given global interconnectedness, stress in specific jurisdictions can have global impacts; multilateral surveillance and a robust global financial safety net are crucial for swift and effective mitigation.

### Executive Directors’ and Chair remarks (summarized views)
- Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities, noting the global economy is at a critical juncture with significant internal and external imbalances and vulnerabilities.
- Directors highlighted:
  - Increased uncertainty and market volatility against stretched valuations.
  - Near-term financial stability risks have risen (as gauged by IMF’s Growth-at-Risk metric).
  - Key vulnerabilities include asset price corrections (with geopolitical risk as a potential trigger), increasing leverage and interconnectedness among NBFIs and banks, and still-rising sovereign debt levels.
  - Risks are firmly tilted to the downside; escalating protectionism and elevated policy uncertainty could further reduce near- and long-term growth in a low-growth, high-debt environment.
  - Divergent and rapidly shifting policy stances or deteriorating sentiment could trigger abrupt repricing of assets and sharp adjustments in foreign exchange rates and capital flows, especially for emerging market and developing economies.
  - Fiscal pressures: unexpectedly high interest rates and new spending pressures (for example, defense) could significantly increase global public debt and limit key development spending, particularly in low-income developing countries.
  - Monetary policy guidance: central banks should remain data-dependent and clearly communicate policy; future policy rate cuts should be contingent on evidence that inflation is heading decisively back toward target while ensuring financial stability is not compromised.
  - Importance of full, timely, and consistent implementation of Basel III and other internationally agreed bank regulatory standards to ensure a level playing field and adequate capital and liquidity.
  - Need for gradual, growth-friendly fiscal adjustment within credible medium-term frameworks, while protecting the vulnerable and prioritizing expenditure and revenue reforms where appropriate.
  - Structural reforms to boost labor force participation, implement pension reforms, and leverage renewable energy and AI-informed production without escalating electricity prices.
  - Continued international cooperation across trade, industrial policy, international taxation, climate, and development and humanitarian assistance to mitigate global spillovers and protect vulnerable populations.

*Global Financial Stability Report: ENhANCING RESILIENCE AMId UNCERTAINTY — Executive Summary (April 2025).*

### CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY

### CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY

### Asset Price Movements and Valuation Pressures
- Stocks in the United States have underperformed somewhat recently after years of outperformance; sell-off picked up in February and accelerated further after April 2.
- Long-term yields fell initially in response to the US imposing tariffs on April 2 amid market turbulence but have rebounded since.
- Market-implied expected inflation over the near- to medium-term in the United States remains meaningfully elevated; latest level for VIX Index is as of April 15, 2025.
- Model-implied long-term rate of growth in earnings—backed out from a standard dividend discount model—has started to decline globally since February, after the United States began to roll out tariffs.
- Implied earnings remain significantly higher for companies in the United States than those in other advanced economies or emerging markets.
- The equity risk premium (ERP) in the US stock market has declined to historically compressed levels since the October Global Financial Stability Report, suggesting investors have a very high appetite for US stocks and that stock prices have further deviated from fundamentals.
- ERPs in other jurisdictions are relatively less compressed and have displayed some notable decompression since the April 2 tariff announcements.
- Despite recent drops, US valuations remain at a premium relative to global peers; implied long-term growth in US earnings has increased more than global peers over the past year.

### Crypto Assets and Interconnectedness
- Bitcoin has experienced strong performance, on net, since the October 2024 Global Financial Stability Report.
- Stablecoins market capitalization has surpassed $200 billion.
- A wave of inflows into Bitcoin exchange-traded products has accompanied Bitcoin price gains; assets in these products now surpass $80 billion.
- Ownership data of five main exchange-traded products highlight broad-based adoption among retail and institutional investors, suggesting growing interconnectedness with the financial system.
- Bitcoin prices have fallen by over 25 percent from their peak at the beginning of the year, indicating sensitivity to pressures in other asset prices.
- Shocks originating in the stock market appear to spill over to Bitcoin to a higher degree than the other way around; Bitcoin spillovers into the S&P 500 have been muted.
- As the regulatory landscape develops, interconnectedness between Bitcoin and mainstream financial markets may increase, requiring close monitoring of emerging financial stability risks.

### Financial Conditions, Growth-at-Risk (GaR), and Macrofinancial Vulnerabilities
- The tightening in global financial conditions since the October 2024 Global Financial Stability Report has accelerated notably in recent weeks amid turbulence following the April 2 tariffs.
- Tightening has been especially pronounced in advanced economy jurisdictions with lofty equity valuations and historically tight corporate credit spreads, causing sharp sell-offs and spikes in volatility.
- Tightening in financial conditions in emerging markets excluding China appears relatively contained, as relatively stable currencies ameliorated the impact of lower equity prices.
- The IMF’s updated GaR forecasts that downside risks expected over the near-term have risen significantly:
  - One-year-ahead global growth is forecast to fall below 0.4 percent with a 5 percent chance (blue dot in Figure 1.5, panel 1).
  - This Growth-at-Risk metric deteriorated from around 1.2 percent as of the October 2024 Global Financial Stability Report (red dot) and is now around the 30th historical percentile.
- The balance of risks to global growth over 2025 continues to be skewed to the downside.
- Three key vulnerabilities supporting the top-down GaR assessment:
  - Further correction of asset prices.
  - Potential strains impacting highly leveraged nonbank financial institutions (NBFIs).
  - Turbulence in sovereign bond markets.

### Financial Institutions: Banking Sector Headwinds from Trade Shock
- The April 2 tariff announcement highlighted risks to the global banking sector; the sharp decline in bank stock prices after April 2 underscores these risks.
- In 2024, widening net interest margins and, for larger banks, strong results from asset management, advisory, and trading services expanded revenues; asset quality improved and banks’ profitability rebounded sharply, particularly in Europe.
- Cyclical factors supporting profitability could be reversed by the trade shock:
  - Reduction of loan loss provisions was a substantial driver of return on assets across regions; the new macrofinancial scenario could reverse this trend as banks are exposed to sectors impacted by tariffs.
  - Recent widening of net interest margins, driven by rising interest rates, contributed disproportionately to profitability gains, particularly in Europe; the downward revision in the trajectory of the policy rate observed after the tariff announcement will weigh on bank net interest margins and reduce revenues.
  - Uncertainty is expected to slow capital markets and advisory activities, reducing noninterest income.
- Trade finance risks:
  - Trade finance supports over $10 trillion in annual transactions and generates $18 billion of bank revenues globally.
  - Tariffs might disrupt trade finance by destabilizing cash flows, supply chains, and regulatory frameworks, prompting banks to tighten lending criteria and potentially triggering a negative spiral of shrinking financing and trade volumes.
  - Tariffs can reconfigure supply chains and require new compliance processes, raising banks’ costs and reducing underwriting appetite.
- International banking vulnerabilities:
  - Internationally active non-US banks are vulnerable to increased US dollar funding pressures that might arise from elevated volatility and geopolitical events.
  - These risks contribute to keeping a relatively large number of banks on the IMF’s monitoring list of weaker banks.

*Source: CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY, Global Financial Stability Report, International Monetary Fund | April 2025*

### 1. Growth Forecast Probability Density

### text - 1. Growth Forecast Probability Density

### Risk weights and banks’ capital buffers
- Banks’ capital adequacy ratios could be overstated if methods used to compute risk-weighted assets (RWA) underestimate true risk.
- Data show wide variation in RWA densities across internationally active banks, even among banks with broadly comparable business models and overall risk profiles.
- The Basel Committee on Banking Supervision found that capital requirements based on risk parameters estimated by banks for exactly the same set of exposures could differ by more than 20 percent (BCBS 2013, 2016).
- The density of risk-weighted assets in global systemically important banks (GSIBs) has declined 12 percent over the past five years (Figure 1.7, panel 1).
- Changes in banks’ portfolios explain part of the decline (for example, increased use of synthetic risk transfers and public guarantees during COVID), and RWA densities declined even for banks using standardized approaches; as supporting measures were unwound, densities reversed for standardized-approach banks but continued to decline among banks using internal models.
- Average RWA densities estimated using internal models show substantial variation even within asset types, supporting literature that risk alone cannot entirely explain RWA density variability.
- The Basel Committee developed policies, including an output floor, to address unwarranted variability of risk weights, but these measures have not been implemented in several jurisdictions.

### Banks’ profitability, valuation, and vulnerabilities
- Banks’ profitability has recently improved, particularly in Europe, but improvements have been strongly driven by cyclical factors that might be reversed by trade tensions.
- Sharp decline in banks’ valuation after the April 2 tariffs announcement highlights challenges ahead and keeps the IMF’s monitoring list of weak banks relatively large.
- Figure indicators (sample of 829 banks) referenced: price-to-book index (October 1, 2024 = 100), return on assets (Percent), sources of change in ROA between 2020 and 2023 (Percentage points), and banks signaling weaknesses in most risk dimensions (Trillions of dollars; number of banks).

### Growing linkages between banks and nonbank financial intermediaries (NBFIs)
- Over the last decade, NBFIs have grown faster than banks; investment funds (mutual funds, hedge funds, private equity and credit funds) have gradually gained a share of global financial system assets from banks, insurers, and pension funds (Figure 1.8, panel 1).
- US banks’ loans and commitments to NBFIs increased from about 6 percent of total loans and commitments in 2010 to about 16 percent, equivalent to almost 120 percent of bank regulatory capital, as of the third quarter of 2024 (Figure 1.8, panel 2).
- Some types of NBFIs are highly reliant on bank funding; hedge funds rely on banks, particularly GSIBs, for more than 50 percent of their total funding and have rapidly increased the total dollar amount of their borrowing from banks (Figure 1.8, panel 3).
- While more diverse credit sources can benefit financial stability, excessive growth among NBFIs predicated on borrowing from banks could make the financial system more vulnerable to high leverage and interconnectedness.
- Example from April 2 tariff-related turmoil: equity and oil price declines prompted banks to ask hedge fund clients for additional margin; margin calls can mitigate bank exposures but may force unwinding of positions that could become disorderly and can fail, exposing banks to credit losses.

### Interconnected private credit funds and cross-border transmission
- Companies are increasingly obtaining financing from private credit funds alongside banks.
- Identified bank exposures to private credit vehicles globally exceed $500 billion (Moody’s Investors Service 2024a), and total bank exposure likely exceeds 25 percent of total assets under management in private credit funds.
- Private credit funds rely on financing types including subscription credit facilities and asset-based lending provided by international bank syndications and collateralized with middle-market loans; large, foreign banks play a crucial role in financing the US private credit ecosystem.
- Direct lenders often depend on revolving credit lines from banks to manage volatility from revolving facilities; revolving debt facilities to business development companies (BDCs) have been increasing along with industry growth (Figure 1.9, panel 1).
- Cross-border nexus: pension funds are increasingly investing in foreign direct-lending funds, and direct-lending funds increasingly extend credit to foreign borrowers (Figures 1.9, panels 2 and 3).
- Internationalization of direct-lending ecosystems supports credit provision but increases the risk that credit shocks will propagate across jurisdictions, underscoring the need for cross-border supervisory coordination.

### Leverage, liquidity risks, and market functioning among NBFIs
- Market turmoil after the April 2 tariff announcement exposed vulnerabilities from elevated leverage among some NBFIs; Treasury selling by leveraged NBFIs in response to margin calls may have amplified moves, echoing the March 2020 dash-for-cash episode.
- Asset managers have significantly expanded use of leveraged positions via long futures positions in Treasuries and US equities; futures provide synthetic leverage but amplify shocks and liquidity risk from margin calls.
- US mutual funds account for about half of the net long positions in two- and five-year Treasury futures contracts (Figure 1.10, panel 2).
- Some asset managers use futures rather than outright Treasury holdings to extend portfolio duration while tilting toward corporate credit, which may improve risk-adjusted returns but raises leverage-related vulnerabilities.
- Figures referenced: net Treasury futures positions (Billions of dollars; interest rate exposure measured in billions of dollars per basis point), mutual funds’ mix of outright and futures positions in Treasuries (Percent of total assets).

*Source: text - 1. Growth Forecast Probability Density (PDF chapter/section) — https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/text.pdf*

### 1. Net Treasury and Equity Futures Positions

### 1. Net Treasury and Equity Futures Positions

### Asset managers’ demand for long Treasury futures
- Asset managers use futures contracts to express directional views and to achieve higher returns in credit while maintaining duration exposure (Figure 1.11, panel 1).
- They take larger net long positions in two- and five-year Treasury futures when more central bank rate cuts are priced in (Figure 1.11, panel 2).
- Positions in 10-year contracts correlate with the steepness of the 2- to 10-year yield curve and may serve as a hedge against economic downturns (Figure 1.11, panel 3).
- Asset manager behavior:
  - Long futures positions on shorter-maturity Treasuries may reflect policy rate cut expectations.
  - Long futures positions on 10-year Treasuries may serve as a hedge against economic downturns.

### Systemic implications and arbitrage with leveraged investors
- Demand by asset managers for long Treasury futures creates arbitrage opportunities that attract leveraged investors (including hedge funds), who assume a large share of the corresponding short futures positions (Figure 1.10, panel 1).
- Leveraged basis trades: hedge funds combine short futures positions with repo-financed holdings of Treasury bonds in so-called leveraged basis trades (see April 2024 Global Financial Stability Report).
- Risk of disorderly unwind:
  - A sudden increase in Treasury market volatility could raise margin requirements.
  - A rise in the repo rate could make basis trades unprofitable.
  - Either development can potentially trigger a disorderly unwind; an unwind reportedly occurred to an extent after the April 2 tariff announcement (persistence and magnitude uncertain at cut-off date).

### Hedge funds’ elevated leverage and exposures
- Asset growth and leverage:
  - Assets under management of leveraged hedge funds have doubled over the past decade (Figure 1.12, panel 1).
  - The average ratio of gross notional exposure to assets has more than doubled over the past decade (black line in Figure 1.12, panel 2).
- Strategy-specific gross notional exposures (ratio to asset values):
  - Macro strategies: 40 times asset values.
  - Relative-value fixed-income strategies: 25 times asset values.
  - Multistrategy hedge funds: more than 15 times asset values.
- As of the first quarter of 2024, in a representative sample of global hedge funds:
  - Interest rate derivatives accounted for almost half of the total gross notional exposure of derivatives and repurchase agreements (Figure 1.12, panel 3).
  - The sample owned $1.6 trillion in Treasury bonds and was short an additional $1.3 trillion in the same instrument.
- External estimates:
  - The US Securities and Exchange Commission estimated $8 trillion in interest rate derivative exposures as of the first quarter of 2024 (sample of qualifying hedge funds reporting these exposures).
  - According to a survey from the International Organization for Securities Commissions, hedge funds held more than $25 trillion in interest rate derivatives as of the end of 2022.
- Transmission during stress:
  - The spike of Treasury yields in March 2020 exemplifies interplay among open-ended and hedge fund forced selling, a spike in repo rates, and rising margin calls.
  - Forced selling by open-ended funds to meet redemptions was a major driver of the March 2020 Treasury yield spike (Banegas, Monin, and Petrasek 2021).
  - Hedge funds have stricter liquidity terms and investor gates, but strong reliance on repos means a spike in repo rates can render basis trades unprofitable and trigger forced selling.
  - Margin calls and portfolio rebalancing can lead to brisk unwinding of futures positions as funds deleverage quickly (Vissing-Jorgensen 2021; April 2020 Global Financial Stability Report).

### Emerging and frontier markets: challenges, vulnerabilities, and scenarios
- Trade tensions and market reaction:
  - The escalation of global trade tensions (including April 2 tariffs announcements) weighed on emerging market growth outlooks and stock prices, especially for directly impacted countries and commodity exporters (Figure 1.13, panel 1).
  - Emerging market bond funds have seen persistent outflows in recent years (Figure 1.13, panel 2).
- Currency, rates, and carry:
  - Emerging market currencies depreciated against the dollar during the recent tariff turmoil, and market-implied foreign exchange rate volatility saw a significant and durable increase.
  - Combined with a decline in emerging market interest rates—investors increasingly expect many emerging market central banks to continue easing or to embark on new easing cycles—the expected risk-adjusted returns on carry trades involving emerging market currencies have fallen (Figure 1.13, panel 3).
- Capital flows at risk:
  - Emerging market capital outflows could reach 1.6 percent of GDP over the next year with a 5 percent chance.
  - In a scenario where the broad dollar index rises and US equities sell off further, the tail outcome could worsen to 1.9 percent (Figure 1.13, panel 4).
- Credit, financing needs, and rates:
  - On aggregate, emerging market sovereign credit ratings have shown positive momentum over the last year after a long period of downgrades following the pandemic (Figure 1.14, panel 1).
  - Private nonfinancial sector leverage and estimates of credit gaps do not clearly signal overheating in most large emerging market economies (Figure 1.14, panels 2–3).
  - Future gross financing needs are forecast to remain above prepandemic averages in most emerging markets, and more government revenue has to be spent on interest payments (Figure 1.14, panel 4).
  - Expectations of weaker growth have led to expectations that monetary policy rates will decline toward their terminal rates (Figure 1.14, panel 5), although real interest rates are still currently around their highest levels over the past decade (Figure 1.14, panel 6).
- Longer-term subdued demand for emerging market assets:
  - Nonresident participation in local currency bond markets (LCBMs) has declined since 2018 (Figure 1.15, panel 1).
  - Nonresident interest has not kept up with the growing size of these markets (Figure 1.15, panel 2).
  - LCBMs have had lackluster 10-year cumulative returns and high realized volatility relative to US corporate bonds, yielding low Sharpe ratios for LCBMs (Figure 1.15, panel 3).
  - Emerging market currencies appreciated against the dollar in only 2 out of the past 10 years (Figure 1.15, panel 4).
- Frontier and low-income economies:
  - Before the April 2 tariff-driven turmoil, market conditions had been improving since the October GFSR, but yields remained high for many frontier economies, increasing refinancing risks as a significant amount of debt matures over the next several quarters.
  - The sharp rise in spreads and tightening of financial conditions heighten refinancing and debt vulnerabilities; issuing debt at high yields could exacerbate debt vulnerabilities when uncertainty about official development assistance persists.
  - Sovereign eurobond spreads for frontier economies narrowed in 2024 and early 2025, aided by macrofinancial reforms, progress on debt restructuring, and credit rating upgrades in several countries (examples cited in text).

### Key statistics and exact figures cited
- Hedge funds owned $1.6 trillion in Treasury bonds and were short $1.3 trillion in the same instrument (as of Q1 2024 sample).
- Gross notional exposures by strategy (ratio to asset values): 40 (macro), 25 (relative-value fixed-income), more than 15 (multistrategy).
- US Securities and Exchange Commission estimate: $8 trillion in interest rate derivative exposures (Q1 2024, sample of qualifying hedge funds).
- IOSCO survey: hedge funds held more than $25 trillion in interest rate derivatives as of end-2022.
- Emerging market capital outflows at risk: 1.6 percent of GDP (5 percent chance); tail scenario: 1.9 percent.

*International Monetary Fund | April 2025 — Chapter 1 (excerpt) from the Global Financial Stability Report: "Enhancing Resilience Amid Global Trade Uncertainty"*

### 2. Private Nonnancial Credit to GDP

### 2. Private Nonfinancial Credit to GDP

### Credit gaps and leverage
- Credit gaps and leverage appear contained in most countries, "with a few exceptions."
- Panel 3 calculates the credit gap for private nonfinancial credit to GDP by averaging three methodologies, including: Hodrick-Prescott, Christiano-Fitzgerald and five-year moving average; latest data are from the third quarter of 2024.
- The methodologies measure the difference between the ratio of private nonfinancial credit to GDP and its longer-term trend.

### Sovereign credit ratings and market expectations
- "Positive ratings momentum has accelerated."
- Panel 1 counts the changes in average rating for an unbalanced sample of 97 emerging market sovereigns on a monthly basis, summed over six months, using the average of Moody’s, S&P, and Fitch where available.
- Markets increasingly expect major emerging markets to ease rates in response to weaker growth.
- Panel 5 derived the terminal policy rates based on market expectations excluding Indonesia and Romania, which are derived from analysts’ consensus expectations.
- Panel 6 computes the normalized ex-ante real policy rates from the difference between policy rate and analysts’ consensus inflation forecasts for 6 months ahead.
- Ex-ante real policy rates remain "relatively high compared with the past decade."

### Interest expense, gross financing needs, and fiscal pressures
- "Interest expenses have increased substantially in recent years."
- Panel 4 compares Change in gross financing needs (2025–2027 versus 2017–2019) and Change in interest expense to revenues (2025–2027 versus 2017–2019) by region (ASIA, CEEMEA, LATAM).
- In the United States:
  - Persistent fiscal deficits—with market expectations suggesting stabilization at 6.5–7 percent of GDP—need to be financed by substantial Treasury securities issuance.
  - On January 2, 2025, the debt ceiling became binding again, and the current ceiling, set at $36.1 trillion, has been reached.
  - A significant share of maturing debt—40 percent of which is concentrated in the first quarter of 2025—may necessitate a steep increase in supply later in the year.
- In the euro area:
  - Net issuance of government bonds is set to ratchet up, driven by higher defense and infrastructure spending.
  - Ongoing normalization of the ECB’s balance sheet is adding to the amount of bonds private investors need to absorb, particularly bunds.
  - A relaxation of Germany’s “debt brake” has prompted concerns about potential increases in government debt issuance.
- Swap spreads and negative bund swap spreads have opened between interest-rate swaps and similar maturity bunds; the credit default swap spread of Germany remains stable around a low level.

### Frontier economies and sovereign market access
- Frontier issuance was robust in the first quarter as spreads compressed and financial conditions eased.
- More recently, the share of frontier sovereigns with higher levels of yields increased, in line with higher US Treasury rates.
- Most international debt is issued when yields are below 10 percent.
- Historically, only a small number of frontier bonds have been issued at yields exceeding 10 percent; these issuances have generally been smaller and of shorter maturity.
- A sizable amount of frontier debt is maturing over the next three years, creating potential rollover risks.

### China: bond market dynamics and financial stability vulnerabilities
- China’s economic outlook is "highly uncertain" amid external and domestic challenges, including tariffs, the property sector adjustment, and local government debt overhang.
- Analysts’ forecasts of one-year-ahead headline inflation have dropped "below 1 percent."
- The term premium on 10-year government bonds has dropped to a "record low."
- Banks—especially smaller banks—have significantly expanded their exposures to government bonds over the past two years; investment funds and wealth management products overtook banks as the largest buyers of government debt in 2024.
- Concentrated holdings of government debt by financial institutions could crowd out bank lending and credit creation and raise questions about potential bond losses should inflation and interest rates change.
- Nearly 90 percent of repo transactions are overnight and seven-day tenors.
- Nonbank financial institutions—particularly securities firms and investment funds—are the largest borrowers and most active participants in the interbank repo market; large banks are the predominant lenders.
- Interbank liquidity tightened sharply in recent months, disproportionately affecting nonbank participants as investors reassessed the pace of monetary easing amid heightened trade uncertainties.
- Recommended policy actions include:
  - Accommodative macroeconomic policies along with structural and promarket reforms to bolster near-term activity and confidence.
  - A comprehensive strategy to address financially unviable developers and local government financing vehicles, potentially including phasing out forbearance measures to ensure timely loan loss recognition by banks.
  - Additional regulatory measures to prevent excessive concentration of bond holdings, enhance management of liquidity and maturity risk, and close regulatory and data gaps.

### Sovereign bond market functioning and dealer constraints
- Elevated levels of government bond issuance will increasingly be absorbed by relatively price-sensitive private investors, which could drive up bond yields via higher risk premia and heighten bond price volatility.
- The Treasury market is now five times dealers’ balance sheets, up from about one-and-a-half times around 20 years ago.
- Spreads on repurchase agreements have become more sensitive to the quantity of Treasury issuance.
- Heightened volatility of bond yields following the April 2 tariff announcements pushed the intermediation capacity of US primary dealers toward its limit.
- Episodes of deterioration in market liquidity could become more likely, pushing up term premiums and Treasury yields.
- The unwinding of leveraged trades (e.g., Treasury cash-futures basis trades and swap spread trades) increased margin requirements and forced deleveraging, contributing to market stress.

*Source: text - 2. Private Nonfinancial Credit to GDP, Global Financial Stability Report: Enhancing Resilience Amid Uncertainty (April 2025).*

### 3. Germany’s Net Issuance Volume versus

### 3. Germany’s Net Issuance Volume versus Swap Spreads

### Dealer balance sheets, market liquidity, and Treasury market functioning
- Swap spreads declined sharply during the recent sell-off, reflecting pressure on dealer balance sheets amid broad deleveraging (Figure 1.19, panel 4, top).
- Treasury market functioning was challenged but did not break down; repo funding costs rose only marginally compared with past episodes (Figure 1.19, panel 4, bottom).
- Marginal repo rate moves contrasted with past episodes such as the “dash-for-cash” 2020:H1 episode.
- Dealer capacity utilization is proxied by normalized net primary dealer positions in Treasuries and agency MBS, scaled between 0 and 1 relative to in-sample peaks (January 2010 to March 2025).
- Residual illiquidity refers to market-value-weighted spline fitting errors of Treasury yields unexplained by interest rate volatility, as captured by the MOVE index.
- The dotted line in panel 3 shows a fitted quadratic relationship between utilization and residual illiquidity from 2020–present.
- Swap spreads reflect the difference between swap rates and Treasury yields of the same maturity; SOFR swap rates are extended historically using adjusted legacy swap interbank offered rates, with a basis adjustment applied.
- EFFR dispersion reflects the difference between the 1st and 99th percentile of effective Federal Fund rates.
- GC-IORB reflects the difference between general collateral overnight repos and the overnight interest on reserve balances.
- The SOFR-EFFR spread reflects the difference between secured overnight funding rates and effective federal fund rates.
- The Fed Fund-SOFR basis reflects the difference between near-term Fed Fund futures and SOFR futures.

### Shift in dealer activities and implications for intermediation capacity
- Dealers have shifted balance-sheet usage toward equity margin loans and options market-making:
  - Equity financing spreads remain more attractive than fixed-income repo spreads, despite some declines after year-end 2024 and some increases in early April.
  - Smaller dealers reportedly have tilted lending toward equity margin loans; major institutional dealers have maintained diversified exposure.
  - Expansion of options market-making activity has further shifted dealers’ focus away from core markets like government bonds (Figure 1.20, panel 3).
- Overcollateralization rates have fallen; equity margin loans are mostly extended in the dealer-to-customer space under looser risk standards.
- Lower overcollateralization exposes dealers to losses if hedge funds cannot repay loans during market stress.
- In panel 2, fixed-income repo and equity margin loan spreads are measured over SOFR for a term of three months; option volumes are based on aggregate exchange data for four most liquid equity index products with maturity splits imputed.

### Cross-border funding, euro area banks, and dollar funding risks
- ECB quantitative tightening has reduced scarcity of European government bonds and increased funding costs for euro area banks, which have turned increasingly to US repo markets (Figure 1.21, panel 1).
- Euro area banks have borrowed dollars against Treasury collateral and swapped proceeds back into euros, improving availability of the dollar as a funding currency (Figure 1.21, panel 2) but deepening cross-border interconnections in dollar funding markets.
- Growing reliance on US repo funding exposes euro area banks to rollover risk during volatile markets (example: after the April 2 tariff announcements).
- A sudden loss of access to US repo funding could widen the euro-to-dollar basis and trigger broader funding strains.
- Elevated fragility of cross-border dollar liquidity underscores the importance of globally coordinated backstops—such as standing repo facilities and central bank swap lines—to mitigate systemic risks and prevent disorderly spillovers.
- Euro area banks also issue unsecured commercial papers as another source for borrowing dollars.
- Example of rollover risk: if dollar borrowings mature before corresponding euro loans to holding companies expire, subsidiaries may need to short-cover dollars in the cross-currency swap market.

### Corporate and household vulnerabilities: corporate credit fundamentals and trade uncertainty
- Since the October 2024 Global Financial Stability Report, corporate cash flows have remained healthy and aggregate balance sheets resilient, but corporate bond spreads have widened recently (Figure 1.1, panel 3).
- US high-yield corporate bond spreads have risen as US business optimism faded (Figure 1.22, panel 1).
- Corporate bond valuations remain stretched relative to macro fundamentals: investment grade and high-yield spread misalignments are around the 10th and 25th historical percentiles, respectively (Figure 1.22, panel 2).
- Corporate bankruptcies have continued to creep up in major advanced economies (Figure 1.22, panel 3).
- A decent share of corporate debt that will need refinancing in the next few years carries a fixed rate below prevailing market yields; an increase in credit spread could challenge weaker firms (Figure 1.22, panel 4).

### Trade policy uncertainty, FX risks, and emerging market firms
- Many countries increased shares of exports to the United States and imports from China, raising exposures to international trade policies; heightened trade uncertainty has weighed on corporate profitability estimates in recent quarters.
- In Q1 2025, optimism about trade negotiations improved profitability estimates for US and rest-of-world firms; estimates were recently revised downward on growing concerns about potentially higher tariff rates (Figure 1.23, panel 1).
- Higher exchange rate volatility raises FX hedging costs and exacerbates funding problems for firms with foreign-currency-denominated debt.
- Only 11 percent of turnover in global FX derivatives is denominated in emerging market currencies, far less than emerging markets’ share in global trade of more than one-third—implying limited access to FX hedging for many EM firms.
- Many emerging market firms have large amounts of dollar-denominated debt; currencies of such firms are prone to larger depreciation (Figure 1.23, panel 2).
- Firms may draw down cash liquidity buffers; cash buffers have declined to below prepandemic levels in both advanced and emerging market economies (Figure 1.23, panel 3).
- Current shares of corporates with interest coverage ratios (ICRs) below 1:
  - Advanced economy corporates: 12 percent.
  - Emerging market corporate firms outside China: 18 percent.
- IMF staff analysis indicates that progressive worsening of profit margins and increases in spreads and effective funding costs could impair corporate debt serviceability nonlinearly:
  - The share of debt with poor serviceability could reach 1.5–2× of 2023 levels.
  - For emerging market corporates, an initial 50 basis point compression in profit margins and an equivalent increase in effective interest rates could raise the share of debt with poor serviceability by 6 percentage points.
  - Under a more adverse scenario of a 200 basis point impact on profit margins and interest rates, the share could increase by 17 percent.
- The sensitivity is higher among emerging market corporates; the adverse scenario implications for advanced economies are indicated but not quantified in the excerpt.

*International Monetary Fund | April 2025*

### 5.6 percentage points to 18 percent.

### 5.6 percentage points to 18 percent.

### The Direct Lending Segment of Corporate Credit Is Showing Mixed Prospects
- Leveraged finance instruments remain under pressure from high interest rates, in large part because of the floating-rate nature of the debt.
- Main categories affected: broadly syndicated loans (BSLs) and direct lending (DL—debt provided by nonbank lenders, that is, private credit).
- Compared with BSLs, the universe of DL borrowers includes a larger share of vulnerable borrowers.
- Credit quality showed some improvement alongside the narrowing downgrade-upgrade gap among DL borrowers through late 2024.
- DL default rates have been broadly in line with other measures of credit distress, for instance, BSL default rates and banks’ loan loss provisions.
- Recent market turmoil following the tariff announcements by the United States starting April 2 drove up spreads on new deals and drove down expected deal flow.
- Nearly half of DL borrowers had negative free operating cash flows.
- Pockets of idiosyncratic risk increased in some industries or borrowers; health care services and software have elevated vulnerability:
  - 20 percent of DL borrowers in health care services have S&P credit estimates in the “ccc” category.
  - 27 percent of DL borrowers in software have S&P credit estimates in the “ccc” category.
- Market participants express concerns that deterioration in borrower credit quality has not been reflected in accounting valuation of DL loans (stale valuation practices).
- Private equity (PE) funds under pressure to return capital to limited partners (LPs) are levering up acquired companies to fund special dividends, further straining borrowers’ debt sustainability.
- PIK (payment-in-kind) provisions allow borrowers to pay a portion of interest in cash and capitalize the remaining interest by adding it to the loan principal; such provisions can defer recognition of underlying financial issues and increase debt burdens over time.

### Household Sector Vulnerabilities Are Increasing due to Elevated Holdings of Equity
- Household assets grew rapidly since the end of the pandemic, fuelled by price increases in equities and residential housing markets.
- Households in most countries now hold more stocks as a share of their financial assets than they did in 2019.
- US households’ stock holdings reached a record high level by the end of 2024.
- US households’ exposure to equities and investment fund shares now modestly surpasses real estate.
- Increasing stock market exposure makes households more vulnerable to a prolonged decline in stock prices; recent tariff-related stock market correction could directly reduce household wealth.
- Financial turbulence may exacerbate market sell-offs if retail investors reduce exposures or redeem investment vehicles such as mutual funds.
- Global real home prices have been declining gradually and only to a modest degree from pandemic highs, in part because of recent rate-cutting cycles among global central banks.
- US home prices have notably remained elevated.
- A longer period of higher interest rates—if inflation proves more persistent than currently expected—may adversely affect households’ debt-servicing capacity and erode real estate asset values.
- Countries with predominantly variable-rate mortgages have seen higher debt-service ratios; countries with predominantly fixed-rate mortgages have seen relatively low debt-service ratios but could face strain as outstanding debt shifts to higher rates.
- Evidence for the United States:
  - Higher interest rates have modestly increased the household debt-service ratio.
  - IMF staff estimates suggest that a 1 percentage point increase in the debt-service ratio is associated with a gradual rise in household delinquency rates in subsequent quarters.
  - Lower-income households are more vulnerable to higher interest rates due to higher exposure to variable-rate debt.
  - Delinquency rates for fixed-rate mortgages remain low, but delinquency rates have increased notably for variable-rate auto loans and credit card debt over the past couple of years.
- US mortgage rate distribution: 83 percent of US mortgage holders have an interest rate below 6 percent, a decrease from the mid-2022 peak of about 93 percent.

### Sentiment in Commercial Real Estate Has Shown Signs of Stabilization, but Headwinds Remain
- Global prices and transaction volumes for commercial real estate (CRE) have continued to stabilize since the October Global Financial Stability Report.
- Total CRE returns were 1.3 percent in the fourth quarter of 2024.
- Transaction volume climbed to positive territory for the first time after bottoming out in the third quarter of 2023.
- Recovery remains uneven across regions and property types:
  - In North America, office sector values have declined 12.3 percent year over year.
  - Values of industrial and retail properties remained steady overall.
  - Offices in Asia and the Pacific and Europe have registered smaller declines.
- Falling policy rates have brought some relief to CRE, with occupier and investment markets showing some positive headline balances.
- Large amounts of CRE debt are coming due, which could drive delinquencies higher.
- Surveys indicate banks appear to have stopped tightening lending standards for commercial real estate; financing conditions for CMBS show mixed signals.
- CMBS and CRE market indicators exhibited:
  - Stabilizing total returns and volumes.
  - Persistent structural weaknesses in office and some retail sectors.

*International Monetary Fund | April 2025 — CHAPTER 1 ENhANCING RESILIENCE AMId GLOBAL TRAdE UNCERTAINTY*

### 13.2 percent, declining most for offices (20.6 percent),

### text - 13.2 percent, declining most for offices (20.6 percent),

### Commercial and multifamily real estate price moves and price gaps
- Sector price declines: "13.2 percent, declining most for offices (20.6 percent)".
- Office price gap (buyer-seller divergence) ranges between "5 percent (Korea)" and "30 percent (Germany)".
- Industrial property buyer-seller divergence examples: "–5.2 percent in the United States" and "1.5 percent in Japan".

### Refinancing pressures and maturing debt
- Estimated US commercial and multifamily real estate mortgages due for payoff in 2025: "$660 billion".
- CRE debt maturing between 2025 and 2029 in the United States: "about $3.2 trillion", which is "more than half of the $6.1 trillion in outstanding debt".
- Negative equity concerns among maturing loans:
  - Nearly "30 percent of office loans maturing in 2025 (about $30 billion)" may be subject to negative equity.
  - "$19 billion of loans on apartment properties (10 percent of maturing loans)" may be subject to negative equity.
- CMBS payoff behavior: "just 61 percent of US loans that matured in 2024 were actually paid off, compared with 78 percent over the previous decade".
- Refinance success rates by conduit loan collateral type in 2024:
  - Office: "Only 32 percent of conduit loans collateralized by office properties were able to be refinanced in 2024".
  - Industrial, multifamily, and retail: "about 85 percent of industrial, multifamily, and retail conduit loans that expired last year" were refinanced.
- Origination of CRE debt versus pre-2019 levels: "down by 41 percent for all segments and 54 percent for office real estate".

### Delinquencies, losses, and liquidity conditions
- Overall US CRE loan default rate in Q4 2024: "about 1.57 percent" (highest since 2014).
- US banks’ net charge-offs on CRE loans at end-2024: "0.26 percent".
- Refinance and liquidity are tightest in the office sector; credit availability is most constrained for offices.
- In securitized markets, "a vast majority of primary dealers recently reported that the rates offered, and haircuts required, to finance CMBSs have stabilized", though liquidity challenges persist, especially for offices.

### Market dynamics, conversions, and vacancy
- Office conversions in the United States: "71 million square feet or 1.7 percent of total office space, as of the third quarter of 2024".
- US office vacancy (market estimates): "between 17 and 20 percent".
- Owners have sold buildings at a discount due to high office vacancy, encouraging price discovery and investor reorientation toward emergent property types.

### Upside and downside risks for CRE
- Downside risks:
  - Trade uncertainty and global supply chain disruptions could cause "lower transaction volumes and higher cap rates", depressing property values and complicating refinancing.
  - "Higher interest rate term premiums" could challenge repayment ability of developers and borrowers.
- Upside possibilities:
  - CRE historically "generally outperforms the broader equity market during easing periods", so the "current Federal Reserve cutting cycle has the potential to support recovery in prices and valuations, everything else equal".
  - Increased attractiveness of office conversions, though currently limited in scale.

### Policy recommendations and supervisory actions (selected points)
- Authorities should prepare for financial instability by ensuring financial institutions can access central bank liquidity facilities and be prepared to "intervene early to address severe liquidity or market functioning stress, especially in core bond and funding markets".
- Liquidity provision can be extended "to nonbanks with appropriate guardrails".
- Financial institutions should be required to "test their access to central bank instruments periodically".
- Implementation of recovery and resolution frameworks is "critical for addressing weak or failing financial institutions without undermining financial stability or risking public funds".
- Central banks should:
  - "Gauge price movements carefully".
  - Where growth and inflation momentum are slowing, "gradually ease monetary policy toward a more neutral stance".
  - Where inflation remains above targets, "maintain a restrictive monetary stance and affirm their commitment to bring inflation back to their targets".
- Emerging market recommendations depend on circumstances:
  - For deep FX markets and low foreign currency debt: rely on "monetary policy and exchange rate flexibility".
  - For shallow FX markets or large foreign currency debts: consider "foreign exchange interventions temporarily or loosen inflow capital flow management measures", provided these do not impair policy credibility.
- Banking-sector and NBFI measures:
  - Ensure "sufficient levels of capital and liquidity in the banking sector".
  - Fully, timely, and consistently implement "Basel III and other international standards".
  - Strengthen "better-resourced, independent, intensive, and conclusive supervision" and continue stress-testing banks’ exposures, "especially those from sectors facing challenges, such as commercial real estate".
  - Enhance reporting requirements for NBFIs to distinguish poorly governed and excessive risk-taking institutions from others.
  - Coordinate authorities overseeing NBFIs to ensure "sound governance structures, mechanisms, and processes" for systemwide and cross-sectoral monitoring.
- Macroprudential stance:
  - Where buffers are insufficient, "policymakers should tighten macroprudential tools".
  - If a downturn is leading to financial stress, "macroprudential buffers could be released to help banks absorb losses and support the provision of credit to the economy".
- Fiscal and sovereign-debt recommendations:
  - With gross sovereign financing needs "forecasted to remain above prepandemic averages in most countries", fiscal adjustments should "primarily focus on credible and growth-friendly rebuilding buffers".
  - Explore liability management operations "where opportunities arise" to manage refinancing risks and reduce or smooth debt servicing profiles.
  - For countries with debt at risk of becoming unsustainable, "early contact with creditors to coordinate an orderly and efficient debt treatment" is advised.
- Crypto and digital-asset guidance:
  - Jurisdictions should "safeguard monetary sovereignty and strengthen monetary policy frameworks", guard against "excessive volatility in capital flows", and adopt "unambiguous tax treatment of crypto assets".
  - Authorities should monitor crypto projects that "may fall under existing banking or securities regulations" and supervise those activities to address vulnerabilities.

*International Monetary Fund | Global Financial Stability Report: ENhANCING RESILIENCE AMID UNCERTAINTY (April 2025).*

### Box 1.2. Lower Bond Yields Are Exerting Pressure on Chinese Insurers

### Box 1.2. Lower Bond Yields Are Exerting Pressure on Chinese Insurers

### Key Findings: Investment Yields and Valuations
- Chinese life insurers are under pressure from lower yields on their investments.
- Valuations of Chinese life insurers, as reflected in their equity prices, are weaker when compared with insurers in other major jurisdictions.

### Solvency and Liquidity Developments
- Solvency ratios of Chinese life insurers have deteriorated.
- Liquidity has improved as insurers have reduced the share of alternative and illiquid investments in their portfolios.

### Data and Scope
- The calculations for the yield on total average investments of Chinese life insurers in panel 1, as well as all calculations in panel 4, are based on a sample that comprises the six listed life insurers or insurance groups in China: China Life Insurance Company, China Pacific Insurance Group, China Taiping Insurance Holdings Company, New China Life Insurance Company, Ping An Insurance (Group) Company of China, and The People‘s Insurance Company (Group) of China.
- The insurers’ equity valuations in panel 2 reflect equity prices.

*Sources: Bloomberg Finance L.P.; China National Financial Regulatory Administration; Moody’s Investors Service; S&P Capital IQ Pro; and IMF staff calculations.*

### 2. Ratio of Military Expenditure to GDP, 1990–2023

### 2. Ratio of Military Expenditure to GDP, 1990–2023

### Indicators and measured shifts
- Panel data visualizations and indices presented include:
  - A sequence of numeric values shown in the military-expenditure-to-GDP figure: 1.2, 2.8, 1.6, 2.0, 2.4.
  - Sanctions panel plotting the number of sanctioned countries over 1990–2023 (axis range shown 0–140).
  - Fragmentation Index plotted over 1990:Q1–2024:Q1 with standardized axis values from −1.5 to 1.0.
- Sources used for indicators: Caldara and Iacoviello 2022; Felbermayr and others 2020; Fernández-Villaverde, Mineyama, and Song 2024; Global Sanctions Database (release 4); SIPRI Military Expenditure Database; IMF staff calculations.
- Note explains:
  - Panel 1: monthly global geopolitical risk index of Caldara and Iacoviello (2022).
  - Panel 2: ratio of median military spending to GDP across countries in the chapter’s sample and share of countries with an increase in this ratio, averaged over the horizontal-axis time periods.
  - Panel 3: number of countries in the sample facing bilateral financial or trade sanctions; trend holds even if Belarus and Russia are excluded.
  - Panel 4: geoeconomic fragmentation index of Fernández-Villaverde, Mineyama, and Song (2024), a composite of 14 indicators (see Online Annex Table 2.1.1 for variables and sources).

### Key numeric facts displayed or stated in the unit
- Fragmentation Index range (standardized): −1.5 to 1.0.
- Sanctions panel axis maximum: 140 (Number of sanctioned countries).
- Military-expenditure-to-GDP figure lists: 1.2, 2.8, 1.6, 2.0, 2.4.
- Time windows and ranges explicitly shown in figures: 1990–94, 95–99, 2000–04, 05–09, 10–14, 15–19, 20–23 (as horizontal-axis groupings).
- The chapter identifies about 450 major geopolitical risk events across countries over 1985–2024.
- Events classified as “major” are those with index scores at least two standard deviations above the average score for the country where they occurred.
- About one-sixth of the identified major events are international military conflicts.

### Observed associations and stylized findings (as reported)
- A composite measure of geopolitical risk has reached its highest level in several decades (as described in the fragmentation figure caption).
- Geopolitical risk events:
  - Tend to trigger a modest and short-lived decline in aggregate stock prices on average.
  - In some cases (for example, the 1973 Arab oil embargo and the 1990 Iraq invasion of Kuwait) produced stronger and more persistent adverse stock market reactions lasting over several months.
- Aggregate stock-price impacts reported:
  - Average impact across events: about 3 percent (decline).
  - Some events caused a substantially larger negative impact, up to 9 percent on average across countries.
- Sectoral and cross-country heterogeneity reported:
  - Commodity-exporting countries often experience positive stock returns after major geopolitical risk events; commodity-importing countries tend to suffer more.
  - Commodity prices, particularly oil, generally rise after major geopolitical risk events, benefiting energy-sector firms.
- Sovereign risk, yields, and exchange rate reactions:
  - Sovereign CDS spreads for commodity-importing countries generally increase more than 1 percent cumulatively one week after major global geopolitical risk events.
  - Sovereign CDS spreads of commodity exporters typically decline.
  - Median long-term government bond yields generally decline in advanced economies (with some large outliers driving average increases).
  - Local currencies, especially of commodity-importing countries, tend to depreciate following major global geopolitical risk events.

### Definitions and methodological notes (explicit in the unit)
- Geopolitical risk measurement:
  - Primarily uses news-based indices by Caldara and Iacoviello (2022), capturing realization and perception of risks relevant for asset prices.
  - Global index: share of news articles in major publications related to adverse geopolitical events in a month.
  - Country-specific indices: share of articles meeting inclusion criteria that mention the country or at least one major city.
- Event identification:
  - Major events defined as country-level index scores at least two standard deviations above that country’s mean.
  - Identified events are verified using publicly available sources; multinational-summit–related protests are not counted as major events from the host country’s perspective.
- Sample composition noted for asset-price interquartile-range figures:
  - Largest 40 economies, classified as advanced and emerging market and developing economies per IMF’s World Economic Outlook.
  - Commodity exporters defined as countries for which commodities constitute more than 60 percent of total merchandise exports (UN Trade and Development data, 2019–2021).

### Conceptual transmission channels summarized (figure content)
- Two key channels through which geopolitical risk affects financial asset prices:
  - Economic channel:
    - Trade restrictions (tariffs, nontariff barriers), financial restrictions (capital controls, sanctions, asset freezing), physical/civilian damage (infrastructure, production facilities, casualties).
    - Transmission via supply-chain disruption, capital-flow reversal (portfolio, FDI, other), cross-border payment disruption, aggregate demand decline, and increasing sovereign debt levels (for example, military expenditures).
  - Market sentiment channel:
    - Increased uncertainty lowers investor confidence and raises risk aversion, affecting asset valuations and potentially increasing liquidity and credit risks.
- Asset categories affected (illustrated): stocks, sovereign/corporate bonds, commodity futures, exchange rates, real estate, oil, gold.

*Italic source: Chapter 2, "GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY," GLOBAL FINANCIAL STABILITY REPORT, International Monetary Fund | April 2025.*

### Annex 2.4 for a discussion of the model and the identification

### Annex 2.4 for a discussion of the model and the identification methodology

### Aggregate effects on stock prices
- Aggregate stock prices generally decline by about 0.3 percent in response to a country-specific geopolitical risk shock, and the effect is persistent and lasts at least two years after the shock.
- More severe geopolitical risk shocks—that is, shocks that increase the geopolitical risk index by at least two standard deviations beyond its mean—have an effect about 7 times larger and are notably persistent.
- Global geopolitical risk shocks have an average effect of about 1 percent on aggregate stock prices and persist for a quarter.
- The average three-month stock market return across countries in the chapter’s sample is about 0.1 percent.
  - A typical geopolitical risk shock has an impact about three times as large as the average three-month return.
  - A large geopolitical risk shock has an impact about 20 times larger than the average three-month return.

### Channels: macroeconomic uncertainty and risk attitude
- Major domestic or global geopolitical shocks tend to spike the Chicago Board Options Exchange Volatility Index (VIX), reflecting increased implied volatility and market uncertainty.
- Decomposition of the VIX into uncertainty and risk aversion components finds:
  - Both risk aversion and uncertainty increase after large geopolitical shocks.
  - The effect on uncertainty is more notable and persistent, particularly when shocks are global.
- Risk aversion increases after geopolitical risk shocks, but the impact on risk aversion is short-lived relative to uncertainty.

### Tail risks
- Increases in geopolitical risk raise downside (tail) risks to aggregate stock prices, defined as prices at the 10th percentile of the aggregate stock return distribution across countries.
- An increase in global geopolitical risk has a quantitatively larger impact on downside risks than an increase in country-specific geopolitical risks and lasts for about six months after the risk event.

### Firm-level exposure and cross-border linkages
- Firm-level panel analysis (sample of more than 60,000 firms in 20 advanced and 20 emerging market economies) finds:
  - Stock returns decline, on average, by about 1 percentage point in the month of a major domestic geopolitical risk event.
  - The average monthly firm-level stock return in the sample is about 0.6 percent.
- Heterogeneity by country group and event type:
  - International military conflicts have much larger effects, at about 5 percent, on stock prices of firms in emerging market economies than on firms in advanced economies.
  - For emerging markets, about one-third of the impact on stock prices appears to be driven by exchange rate movements vis-à-vis the US dollar.
  - The impact on stock returns appears persistent up to at least six months for emerging markets.
- Cross-border trade and investment linkages:
  - Involvement of a country’s main trading partner in a major geopolitical risk event, on average, reduces stock returns for the country’s firms by about 1 percentage point.
  - The impact is more pronounced, up to 2.5 percentage points, when a country’s main trading partner is involved in a military conflict.
  - Firms that generate a significant proportion of revenues from, or have subsidiaries or shareholding companies in, countries affected by a geopolitical risk event generally experience an additional decline in their stock prices of 0.1–0.25 percentage points (controlling for other macro and sectoral effects).
  - For emerging market firms, the impact appears to be primarily through their shareholding companies, rather than their subsidiaries, in countries affected by major geopolitical risk events.

### Case study: Russia’s 2022 invasion of Ukraine
- Timeline and market reaction:
  - Media reports of Russian troop movements near the Ukrainian border on October 30, 2021 preceded a gradual decline in the Russian stock market.
  - Russia’s military invasion of Ukraine on February 24, 2022 led the Russian stock market to plummet by 33 percent and trading on the Ukrainian stock market to be suspended.
- Cross-border spillovers and sectoral impacts:
  - Stock returns of firms in the defense sector in other economies generally rose on investors’ expectations of increased military expenditure.
  - Firms in the energy sector benefited from surging oil prices on fears of disruption in the global oil supply.
  - By contrast, firms in defense and energy sectors with direct revenue exposure to Russia or to Ukraine were adversely affected.
- Measured firm impacts:
  - Stock returns of firms with high revenue exposures to Russia or Ukraine—defined as two standard deviations above the average exposure in the sample—had cumulatively declined about 0.7 percentage points seven days after the invasion, after accounting for country- and sector-specific factors.
  - Stock returns of firms with a subsidiary in either or both countries had declined 2.5 percentage points, on average, a week after the war began.
  - The average revenue exposure of firms in the sample to Russia or Ukraine before the onset of the war was about 0.1 percent; a two-standard-deviation increase represents firm revenue exposure of about 1.3 percent.
- Firms’ exposure to Russia, both through subsidiaries and through revenues, has generally declined over time.

*Source: Annex 2.4, GLOBAL FINANCIAL STABILITY REPORT: ENhANCING RESILIENCE AMId UNCERTAINTY, International Monetary Fund | April 2025.*

### 1. Cumulative Stock Market Returns in Russia and

### 1. Cumulative Stock Market Returns in Russia and

### Firms’ Exposure to Russia
- Share of firms with subsidiaries in Russia declined from more than 2 percent in 2015–21 to about 1.5 percent in 2023.
- Size of these subsidiaries halved, from about 0.3 percent of firms’ total assets to about 0.14 percent.
- Share of firms with revenue exposure to Russia has remained somewhat stable, while the average size of firms’ revenue exposure appears to have decreased marginally.
- Revenue exposure changes show heterogeneity across countries: declines for firms in several European countries and increases in some other countries (from relatively low levels), suggesting potential reorientation of trade and investment linkages after major geopolitical risk events.

### China–US Trade Tensions: Effects on Firm Stock Prices
- Stock prices reacted negatively to tariff announcements by China and the US during 2018–24.
- After US announcements of tariffs on China, stock prices of Chinese firms declined by nearly 4 percent, on average.
- The average stock return in these firms in the two-year period prior to the imposition of these tariffs was about 0.1 percent.
- On May 6, 2019, when the US announced tariff increases on Chinese products amounting to $200 billion, average stock returns declined by almost 8 percent.
- US firms’ stock prices declined by 1.3 percent, on average, after US government announcements regarding tariffs on China.
- Not every tariff announcement produced pronounced reactions; some dates (March 22, 2018; May 14, 2024) had negligible or positive impacts.
- China’s retaliatory tariff announcement on August 23, 2019, led to average stock price declines of:
  - US firms: 1.6–1.8 percent.
  - Chinese firms: 0.3–0.7 percent.
- Tariff effects extend beyond directly targeted sectors: firms in sectors facing tariffs and other firms experienced similar declines, indicating interconnectedness and broader uncertainty.

### Exposure Channels: Revenue and Subsidiary Links
- Chinese firms with pre-announcement revenue exposure to the United States experienced stock-return declines about 0.2 percentage points larger after US tariff announcements than comparable firms without such exposure.
- After a US tariff announcement, stock returns of:
  - US firms with subsidiaries in China, and
  - Chinese firms with subsidiaries in the United States
  dropped, on average, by 0.6 percentage points more than returns of comparable firms without such subsidiary presence.
- These results indicate cross-border contagion effects through trade and financial linkages.

### Sovereign Risk Premiums and Geopolitical Risk
- Within one month of a country’s involvement in a major international military conflict, sovereign CDS spreads widen by:
  - about 40 basis points in advanced economies.
  - about 180 basis points in emerging market economies.
- Sovereign risk premiums also increase when a country’s trading partners are involved in international military conflicts; effects are larger when the trading partner is a main export or import partner.
- Amplifying factors for foreign geopolitical shocks:
  - Emerging markets with public-debt-to-GDP ratios above the sample median show larger sovereign premium increases when key trading partners are involved in conflict.
  - Sovereign CDS premiums increase by 100 basis points more in economies with international reserve adequacy ratios below the sample median.
  - Sovereign CDS premiums increase by 120 basis points in economies with institutional quality below the sample median.
- Long-term sovereign yields:
  - Tend to decline in traditional safe haven countries (Germany, Japan, Switzerland, the United Kingdom, and the United States) following major domestic geopolitical risk events.
  - Tend to increase in emerging markets following major geopolitical risk events.
  - Safe haven effects are more pronounced for major foreign geopolitical risk events; long-term yields notably increase in other advanced economies but not in traditional safe havens.

### Pricing of Geopolitical Risk in Asset Markets
- Stock-return sensitivities to geopolitical risk (GPR betas) are nearly symmetric across stocks after controlling for market factors, with many stocks showing positive and negative GPR betas.
- Sector patterns in GPR betas:
  - Energy and defense sectors exhibit higher GPR betas (their value rises after a geopolitical risk shock).
  - Consumer goods sector tends to have lower GPR betas.
- Evidence of investor pricing of geopolitical risk:
  - Cross-sectional analysis for 2012–2021 shows a statistically significant negative premium associated with geopolitical risk shocks.
  - On average over that period, a one-percentage-point difference in the GPR betas (equivalent to the difference between the average GPR beta for the energy sector and that for all other firms) leads to a negative premium of 0.01 percent- 

*Source: GLOBAL FINANCIAL STABILITY REPORT: ENhANCING RESILIENCE AMId UNCERTAINTY, International Monetary Fund | April 2025*

### CHAPTER 2 GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY

### CHAPTER 2 GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY

### Pricing of geopolitical risk in equity markets
- Cross-sectional variation in one-month-ahead excess returns used to proxy risk premia; the GPR (geopolitical risk) beta premium turned positive after Russia’s invasion of Ukraine in 2022 (Figure 2.11, panel 2).
- A portfolio that buys stocks with GPR betas in the highest decile and sells those with GPR betas in the lowest decile:
  - Generated statistically significant negative premiums of about 0.5 percent per month during 2012–21.
  - Generated a positive premium of about 1.1 percent after 2022.
- The average difference in GPR betas between the first and tenth deciles is about 35 units; the marginal impact of a one-unit increase in GPR beta on one-month-ahead excess return is about 0.01 percentage point.
- Interpretation: Before Russia’s 2022 invasion of Ukraine, investors demanded a premium for holding stocks that responded negatively to geopolitical risks; after the invasion, investors favored stocks that served as a hedge against such risks.

### Pricing of geopolitical risk in options markets (downside and tail protection)
- Out-of-the-money put options used to measure costs of protection against downside risks and downside tail risks (method follows Pastor and Veronesi 2013; see Online Annex 2.8).
- Around Russia’s 2022 invasion of Ukraine:
  - Premiums for protecting against downside risk and additional premiums for downside tail risks increased moderately before the invasion and surged notably around the event (Figure 2.12, panels 1–3).
  - Premium increases were largest for options on Russian firms, and also rose for options on firms in European countries.
  - Sectoral breakdown: premiums remained stable in the energy sector; options on firms with higher exposure to Russia and Ukraine through subsidiaries or revenues faced higher premiums (Figure 2.12, panel 4).
- Around China–US trade tensions (tariff announcements in 2018–19):
  - Option premiums for protecting against downside and tail risks increased for Chinese and US firms after the announcements (Figure 2.13, panels 1 and 2).
  - Premiums did not increase, on average, for options on stocks of firms in other countries after these announcements.
  - Tail-risk protection premiums rose more prominently than downside-risk protection premiums, indicating a stronger impact on perceived tail risks.

### Exposure of banks and investment funds to countries afflicted by major geopolitical risk events
- Cross-border bank claims and liabilities involving countries afflicted by major geopolitical risk events were about 8 and 10 percent of total cross-border bank claims and liabilities, respectively, as of the second half of 2024 (Figure 2.14, panel 1).
- The share of holdings by equity funds of assets domiciled in these countries reached 13 percent of these funds’ assets in 2024 (Figure 2.14, panel 2).
- Most banking sectors and investment funds hold assets in countries exposed to major geopolitical risk events.
- Banks’ exposure to countries involved in major geopolitical risk events has increased over time; the average share of cross-border bank claims on countries experiencing major geopolitical risk events was about 3 percent, on average, from Q1 2000 to Q1 2024 (footnote).
- Financial institutions have rebalanced exposures to Russia and Ukraine:
  - Cross-border banking claims on Russia and Ukraine fell significantly after the annexation of Crimea in 2014 and after Russia’s invasion of Ukraine in Q1 2022 (Figure 2.14, panel 3).
  - Investment funds reduced their direct exposures to both countries by 60 percent after Russia’s invasion of Ukraine (Figure 2.14, panel 4).
  - Investment funds also reduced indirect exposures to these countries by lowering holdings of firms in third countries with high revenue or subsidiary exposures to Russia or Ukraine.

### Implications for bank stability and lending
- Major geopolitical risk events can elevate market, liquidity, and credit risks for banks and nonbank financial institutions, and can challenge operational resilience (cyberattacks, fragmentation due to sanctions/capital controls).
- Empirical results indicate stronger adverse impacts on emerging market economies:
  - Bank equity tends to decline when a bank’s home country or key foreign counterparts are involved in an international military conflict (Figure 2.15, panels 1 and 2).
  - Declines in bank equity contribute to declines in loan growth (Figure 2.15, panels 3 and 4).
- The results are based on an unbalanced panel of more than 6,000 banks from 21 advanced economies and 15 emerging markets, with controls for bank and macro variables and bank and year fixed effects; solid bars/markers indicate statistical significance at the 10 percent or lower level.

### Implications for investment funds (returns and flows)
- Investment funds with significant exposure to countries involved in geopolitical risk events, especially international military conflicts, experienced lower returns and lower net flows:
  - Across international military conflicts, bond funds with a 10 percent exposure of fund holdings to countries affected by a conflict subsequently suffered a 1.0 percentage point decrease in returns and a 2.3 percentage point decline in flows (Figure 2.16, panels 1 and 2).
  - Equity funds experienced, on average, about a 0.2 percentage point decrease in returns and a 0.3 percentage point decline in flows.
  - After Russia’s invasion of Ukraine, investment funds with 10 percent of their holdings directly exposed to Russian or Ukrainian assets experienced about a 6 percent decline in cumulative returns within a week and an 8 percent decrease in cumulative flows over the subsequent six months (Figure 2.16, panels 3 and 4).
- China–US tariff announcements did not materially affect investment funds overall during 2018–24, though funds holding assets in Chinese firms in sectors affected by US tariffs experienced somewhat lower returns.

*Source: CHAPTER 2 GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY (text - CHAPTER 2 GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY).*

### 4.4 percent, respectively, for advanced economies. The results also

### CHAPTER 2 GEOPOLITICAL RISkS: IMPLICATIONS FOR ASSET PRICES ANd FINANCIAL STABILITY

### Impact on Investment Funds and Financial Intermediation
- Equity funds without exposure to affected countries before the risk event experienced 0.7 percent monthly return and 0.002 percent net flows, on average.
- Bond funds without exposure before the risk event experienced 0.2 percent return and 0.01 percent net flows.
- Funds with 10 percent of their assets from issuers generating substantial revenue from, or having subsidiaries in, Russia or Ukraine saw declines of about 0.2 percent and 0.3 percent, respectively.
- A 10 percent exposure to Chinese firms directly affected by US tariffs decreased, on average, by about 0.1 percent in the month after the US tariff announcements; there was no statistically significant impact on flows into funds.
- An increase in subsidiary or revenue exposure decreased cumulative flows by a small amount (see Online Annex Figure 2.10.3).
- Major geopolitical risk events generally:
  - Increase borrowing costs and nonperforming loans after events.
  - Reduce performance and intermediation capacity of financial institutions, especially those in emerging markets.
  - Cause cross-border contagion through trade or financial linkages.
- The analysis confirms that geopolitical shocks related to international military conflicts have particularly pronounced effects and could be more severe if shocks become larger, more frequent, or more persistent.

### Quantitative Effects on Tail Risks and Stock Markets
- A two-standard-deviation increase in the global geopolitical risk index is, on average, associated with a decline of 2 percentage points in downside tail risks to stock market returns (defined as the 10th percentile of the distribution of aggregate stock market returns) in advanced economies at a six-month horizon.
- For emerging market economies, a two-standard-deviation increase in the global geopolitical risk index raises downside tail risks but the effect is not statistically significant.
- A large country-specific geopolitical risk event (index scores two standard deviations above the country-specific average) raises downside tail risk to stock returns by about 3 percentage points.
- The 10th percentile of stock market returns for advanced and emerging market economies in the sample is –5 percent.
- The regressions control for real economic uncertainty, which significantly exacerbates the risk of future stock market crashes in both advanced and emerging market economies.
- Distinguishing between geopolitical acts and threats shows that geopolitical acts rather than threats have a strong impact on downside tail risks to stock markets.
- Note: the analysis focuses on the 10th percentile of cumulative stock returns over 1-, 3-, 6-, and 12-month horizons using the overall stock price index and a sample of about 30 advanced and emerging market economies covering 1990–2024.

### Conclusion and Policy Recommendations
- Major geopolitical risk events could pose a threat to macrofinancial stability.
- Key observations:
  - Asset prices have reacted only modestly to most geopolitical risk events overall, but reactions vary significantly across event types, asset classes, countries, and sectors.
  - Stock prices can decrease and sovereign risk premiums can increase meaningfully following major geopolitical risk events, notably international military conflicts.
  - Countries with limited fiscal and international reserve buffers are particularly vulnerable to rises in sovereign risk premiums.
  - Sudden realization of major geopolitical risks can adversely affect bank and nonbank financial institutions, with adverse consequences for macrofinancial stability.
- Recommendations for financial institutions and policymakers:
  - Managers and oversight bodies should consider the implications of geopolitical risks and devote adequate resources to identifying, quantifying, and managing these risks.
  - Policymakers should explore implications for supervision and regulation of financial institutions; scenario analysis and stress testing that incorporate interactions of geopolitical risks with market, credit, and liquidity risks can support assessment and quantification of transmissions to financial institutions.
  - Collect data on financial institutions’ direct and indirect exposures to geopolitical risk to support scenario analysis and stress testing.
  - Capital and liquidity buffers at financial institutions should be able to absorb extreme but plausible losses associated with the materialization of geopolitical risks.
  - Ensure appropriate tools to tackle financial stability consequences of stress in nonbank financial intermediaries, including use of liquidity management tools by open-end funds to mitigate systemic impact from abrupt outflows.
  - Strengthen crisis preparedness and management frameworks for potential financial instability arising from escalation of geopolitical tensions.
  - Continue efforts to deepen and develop financial markets in emerging market and developing economies, accompanied by robust regulatory frameworks and clear guidelines for derivatives and hedging activities.
  - Contain fiscal vulnerabilities to limit amplifying effects of high public debt on sovereign borrowing costs amid elevated geopolitical risks; economies reliant on external financing should ensure adequate international reserves in line with the IMF’s Integrated Policy Framework.

*International Monetary Fund | April 2025*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/text.pdf_